NEW TECHNIQUES
The Yen, Recursed
by Dennis Meyers, Ph.D.
Trends may be identified by using the exponential moving average, a popular smoothing method based on a mathematical recursive calculation. Combine it with a trend estimate to identify changes in the direction of the market.
The Japanese yen (JY) is a major currency traded worldwide by corporations, institutions, banks, commodity funds and futures traders. The yen is traded 24 hours a day and most of the world's largest banks make a two-sided market in the yen and its associated derivatives. Small traders, however, are constrained to trade the yen futures on the Chicago Mercantile Exchange (CME). The JY futures are traded from 7:20 am to 2 pm on the CME and from 2:30 pm to 7:05 am overnight Monday through Thursday, and 5:30 pm overnight to 7:05 am Sundays and holidays on the CME Globex system. While the CME yen futures trading volume is small compared with total worldwide bank and institutional trading volume, arbitrage keeps the futures prices in line with the bigger markets.
DATA DISCUSSION
The JY futures contract on the CME trades in the quarterly cycles of March, June, September, and December. The current active yen futures contract is the JY December 1998. This is the CME futures contract that expires on the second business day before the third Wednesday of December 1998. The JY March 1999 will become the active contract one week before the December 1998 expiration day.
The yen is the currency of Japan. Each JY futures contract is worth the dollar value of 12,500,000 yen. On September 4, 1998, The Wall Street Journal reported that the JY December 1998 futures contract closed at 0.7584 dollars per 100 JY, making one JY contract worth $94,800 = (12,500,000)(0.7584/100). The JY future trades in units of $0.000001 per yen, and thus, a move of one tick of $0.000001 is worth $12.50 per contract ($0.000001 $/JY multiplied by 12,500,000 = $12.50).
Yen futures started trading on 1975. However, for the purposes of this article, we will limit our study to the price history from January 1, 1988, to today, using a JY futures continuous contract. Since JY futures contracts expire each quarter, a continuous contract is constructed by switching to the active contract on rollover day and back-adjusting the difference in prices between the new contract and the old, thus creating a smooth continuous contract.
The performance results from systems using continuous contracts cannot match actual results from trading real contracts because of the costs of actually having to roll over, as well as execution slippage. Execution slippage is the difference in prices from the actual execution of an order when a buy or sell signal is given and the price at which the computer system assumes the order was executed. When rolling over via actual executions, the difference in prices between the new contract and the old on rollover day may not be the same as the closing prices the computer uses to construct the continuous contract.
Another problem with continuous contracts is that the past data is back-adjusted by the difference in prices between the two contracts on rollover day. Systems developed on continuous contracts that use some form of percentage of prices will be affected somewhat by this difference adjustment to past prices. Despite these qualifiers, system results based upon continuous contracts are still indicative of the worth of the trading system.
